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Important Details About 1031 Exchanges You Need to Know Every U.S citizen is subject to many tax laws, and section 1031 is one of the most popular provisions among investors. This tax law is mentioned widely by realtors, investors and title companies like it is very important. The honest truth is that 1031 is very crucial in promoting investments in the country. This is because this law allows business people to swap a business asset or investment for another asset. The the benefit of this law is that you can swap the asset without having to pay immediate tax since capital gains are not recognized. This process allows investments to grow, but certain rules always apply to ensure that the provision is not being misused. Before you think of making an exchange, here are a few rules of engagement that you should follow through. While 1031 allows swapping of investment and business property, the law does not apply to personal use. This means that you cannot swap your home for another. Regardless, there are some loopholes that can be exploited to allow the exchange of personal property. A a tax expert will be I a better position to help understand the exchanges that are legally possible. The the general rule is that the assets being swapped must be of like-kind. While 1031 exchange is only for like-kind, the term has a very broad definition which means that something like a building could be considered like-kind with raw land. The 1031 exchange allows for people to do a delayed exchange. This is where one sells their asset and uses a middle man to hold the cash after the sale. The proceeds from the sale are used to purchase another property that the owner of the previous property is interested in. The transaction of this kind is treated as a swap. It is important to follow the guidelines of the 1031 exchange when making a delayed exchange. One important rule is that the owner of the asset cannot hold the cash received after the sale of the asset since doing so will spoil the 1031 treatment. You are also required to choose a property that you wish to acquire. You can also designate as many properties as you wish as long as they meet the criteria set out under law.
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It is also important to know that all 1031 exchanges must be done within six months. It is, therefore, advisable that you make a swap when you have everything in order. Also remember that in the case of a delayed exchange, any cash that remains after the replacement property is bought must be taxed. Also remember to account for mortgages and loans on the property. So when you get property with lesser obligations, the reduction in obligations is treated as a gain which is taxable.How I Became An Expert on Taxes